Treasury Rates’ Slow Upward March Boosted Pension During April

While volatility persisted during the month, April in the end delivered strong equity market gains and, thanks to favorable trends in interest rates, the funded status of U.S. pension plans jumped as a result.

According to LGIMA’s Pension Solutions Monitor Report for April 2018, the month of April brought plenty of sources of concern in terms of global and U.S. equity asset prices. Concerns mounted during the month about trade disputes and geopolitical tension, but investors still experienced positive price action as earnings, especially in the U.S., exceeded expectations.

“General confidence remains as global growth prospects appear steady,” LGIMA reports.

In terms of interest rate action, during April, the 10-year Treasury rate touched 3.0% for the first time since 2014, “as both headline and core inflation ticked slightly higher.”

“The U.S. Federal Reserve remains focused on wage growth as a primary driver of inflation, which also increased,” LGIMA explains. “With unemployment steady for the past few months, it is clear that Fed action will be centered around the inflation point. The market is currently ricing a 35% chance of a rate hike in May, but has priced in a June hike at a probability of about 93%.”  

On a slightly sour note, LGIMA reports U.S. long-duration credit “continued to leak four basis points wider in March, ending the month at year-to-date wides of 152 basis points.” New issuance was larger than expected, LGIMA says, and in the last few weeks there has been a “noticeable improvement in demand for credit from some of the key buyers that went missing in the first quarter.”

“One might think that high demand would continue to tighten spreads, but they continue to widen even as earnings continue to surprise on the upside,” LGIMA says. “Part of the problem may be that investors simply don’t believe improvement in demand will persist.”

Overall, however, credit spreads had a minimal impact on pension funding ratios over the month of April, the LGIMA Pension Solutions Monitor Report concludes.

In combination, these forces resulted in a 2% increase in average funded status during April, driven mainly by the increase in Treasury rates and positive equity returns. Overall, liabilities for the average plan were down 1.9%.